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By Knight Kiplinger

The Kiplinger Washington Editors

Oct. 10, 2008

Stock Market Panic:
What Happens Next?

A heart-stopping, gut-wrenching stock market plunge is classic panic. It'll end eventually, but the economy will still need to work through a recession. This week's Kiplinger Letter looks at how we see the economy and government moves to shore up credit markets unfolding in the months ahead.

ALSO IN THIS ISSUE: Real Estate, Financial Services, Health Care Policy, Election 2008, Business Costs and Airlines & Travel.

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What's Propping Up the U.S. Economy?

The twin blasts of soaring energy costs and the subprime crisis should have blown a hole in the economy. Are two our favorite villains, oil sheikhs and China, the reason it's still afloat?

Worth Reading: The Quick Take from Kiplinger

December 2007

George Friedman

CEO, Stratfor

George Friedman, a recognized expert and author on national security and intelligence issues, is the CEO of Stratfor (short for Strategic Forecasting Inc.), the world’s leading private intelligence company. Founded in 1996, Stratfor delivers to its clients real-time intelligence, analysis and forecasts on geopolitical, economic, security and public policy issues.

Of all the uncertainties about the economy, one particularly baffling question sticks out: Why isn't it worse yet? Given the subprime crisis and oil stubbornly nagging at the $100-a-barrel mark, why, when similar past shocks have caused economic tumult, haven't the stock and bond markets tanked? Perhaps we just haven't arrived at that point and the worst is yet to come.

George Friedman, the founder and head of the private intelligence and analysis firm Stratfor, may have an answer. He suspects that the wealth of China and the Persian Gulf oil states may be what's keeping the economy so buoyant. "It is the only explanation for what we are seeing," Friedman writes. "The markets should be selling off like crazy, given the financial problems. They are not. They keep bouncing back, no matter how hard they are driven down. That money is not coming from the financial institutions and hedge funds that got ripped on mortgages. But it is coming from somewhere. We think that somewhere is the land of $90-per-barrel crude and really cheap toys."

Pumping cash back into the U.S. economy and markets is not out of compassion or some sinister plot to control U.S. businesses and assets, he says. Like most economics, it's a matter of simple self-interest. Much of the wealth of China and the Arab oil states is tied directly to the dollar "and the last thing they want to do is sell those dollars in sufficient quantity to drive the dollar's price even lower." And Friedman says the situation should not be seen as a sign of American decline or weakness. "When others must invest in the United States, however, they are not the ones with the power. The United States is."

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